How Liquidity and Risk Determine Investments in Tax Savings Instruments?

Business

oi-Sunil

By Sunil Fernandes

Published: Monday, January 5, 2015, 10:48 [IST]

It's just a little under three months before the financial year ends and your tax planning period for the financial year 2014-15 would end too.

You have to make some difficult choices like look at the best tax planning especially tax benefits available under Sec 80C of the Income Tax Act. Here are a few choices that you can make considering your risk profile, liquidity and tax benefits under Sec 80C of the Income Tax Act.

Risk Taking Ability and Tax Saving Schemes

If you have the ability to take risk the best bet would be Equity Linked Savings Schemes. This is because it has the ability to fetch you higher returns than instruments like the PPF, Tax Saving Bank Deposits and instruments like the NSC, which also offer tax benefits under Sec 80C of the Income Tax Act. However, it must be noted that there can be negative returns and losses that could also happen making the instruments more risky. No guarantee of returns and hence if you have a penchant for risk do invest in the same.

PPF, NSC and Bank Tax Saving deposits offer steady returns under Sec 80C

There are a variety of other tax saving instruments that offer you tax benefits under Sec 80C like the NSC, PPF and Bank Tax Savings Deposits. However, they come with assured returns and most of these instruments offer returns in the region of 8-9 per cent along with tax savings upto Rs 1.5 lakhs.

Liquidity and Tax Savings Schemes

If you want better liquidity it's best to opt for ELSS schemes which are encashable after three years. Most of the other schemes like bank tax deposits, NSC have a higher lock-in period of 5 years. PPF has a lock-in period of almost 15 years, though you can partially withdraw the fund earlier then that.

Which to choose?

Depending on your ability to take risk, you can make the ideal choice. If you are looking at taking more risk to earn more money you can look at an investment like ELSS, where there is no guarantee of fixed returns. On the other hand if you are looking at tax saving instruments that are less risky the best bet would be an instrument an NSC, PPF and Bank Tax Saving fixed Deposits where there is no risk whatsoever. You need to make a careful choice depending on your own ability to take risk and the timeframe involved.

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